Cabot Dividend Investor Issue: March 12, 2025

Bank on Garbage

This is the worst market we’ve seen in a while. And the ugliness could last a while.

Selling accelerated this week after last week’s drop was the worst since September. The S&P is down over 4% YTD and at the lowest level in more than five months. The Nasdaq index is in correction territory, down more than 10% from the high.

Investors had been expecting a higher level of economic growth in the months after the election. Now, slower growth is expected. Interest rates were rising and now they’re falling. Technology stocks propelled the market higher for most of the last two and half years. Now, the sector is dragging it lower.

Meanwhile, tariff talk is all the rage. Nobody really knows if the tariff issues will be quickly negotiated or have a lasting negative impact. The constant media attention doesn’t help. It all adds to the uncertainty. The market had been riding high for more than two years. A comeuppance has arrived. How long will it last and how deep will it be?

During times of maximum uncertainty like this, healthcare stocks are a great place to be. That was the topic of last month’s exquisitely crafted issue. No matter what happens with the economy or the market, people still get sick and take medication. It’s also a growth industry as the population ages at warp speed. But there is another industry with both defensive and growth characteristics that’s ideal for uncertain times – garbage.

That’s right, garbage. I take out the garbage twice a week no matter what and I’m sure you do too. Interest rates could go through the roof or back near zero. We could be in a recession or an economic boom. There could be war or peace. My wife will still remind me that the garbage is full and has to go out every week like clockwork.

We live in the garbage capital of the world. For some reason, Americans generate more garbage than anyone else. And it isn’t even close. While the U.S. has about 5% of the world’s population, we produce about a quarter of the world’s waste. This country generated 292 million tons of waste in 2018 (the last universally reported number), up from 251 tons in 2012, and nearly double the waste produced in 1980.

That’s enough waste to produce a pile long enough to go to the moon and back – 29 times. And that’s every single year. Waste services are big business. All that garbage must be collected and dumped or processed constantly. In 2023, the U.S. waste management services industry generated $145 billion in revenue. That was up from $137 billion the prior year and that number is likely to keep rising.

Garbage will continue to pile up regardless of where interest rates go, the level of economic growth, or the fallout from tariffs. The market could soar, or the world could go to Hell in a handbag. Either way my wife will nag me every week to take out the garbage.

Bank on a company with certain earnings and revenue in uncertain times. Defensive stocks tend to outperform during and after volatile markets. In this issue, I highlight a company that is the unquestioned leader in waste services. The stock has a strong track record which could get even better in the years ahead.

What to Do Now

It’s been a rough market. We’ve seen rough patches periodically over the last couple years. But the market has always bounced right back. But this feels different. It appears that we are in for a steeper decline than we have seen recently. And it could be a while before the market really turns around and kicks butt again.

I don’t think this is the end of the bull market. It may be a rough patch that lasts longer than normal. If the economy doesn’t slow, rates will come down. Artificial intelligence stocks may be down, but they certainly aren’t out.

Narratives constantly change. Interest rate expectations change from a less than previously expected decline and back again a few times a year. Inflation was “under control” and now it’s sticky again. The artificial intelligence trade went from red hot to ice cold. But these trends can reverse in the next few months.

You don’t want to panic and start selling all over the place because it could be a strong market again in a couple of months. But some additional caution is warranted. The rating on four portfolio stocks is being lowered this week from a “BUY” to a “HOLD.”

These include the more cyclical stocks including Business Development Companies Main Street Capital Corporation (MAIN) and FS KKR Capital Corp. (FSK) as well as natural gas exporters Cheniere Energy, Inc. (LNG) and Cheniere Energy Partners, L.P. (CQP). If the slower growth gets real and has lasting traction, these stocks, which have held up well so far, could get hit. We’ll pull back for now and see how things unfold.

I am, however, in favor of buying Broadcom (AVGO) and Constellation Energy (CEG) at current levels. It seems counterintuitive, but hear me out. These stocks have been crushed already. If they do fall further, both are capable of making it up in a hurry. Both companies have rapidly rising revenues and are poised in front of huge trends. It is likely that both stocks will trade at much higher prices by the end of the year. It’s probably too early to take advantage of the recent price declines for most stocks. But these two are an exception.

Recent Activity

February 26
UnitedHealth Group Inc. (UNH) – Rating change “BUY” to “HOLD”

March 5
Constellation Energy Corporation (CEG) – Rating change “HOLD” to “BUY”

March 12
Cheniere Energy Partners, L.P. (CQP) – Rating change “BUY” to “HOLD”
FS KKR Capital Corp. (FSK) – Rating change “BUY” to “HOLD”
Main Street Capital Corporation (MAIN) – Rating change “BUY” to “HOLD”
Cheniere Energy, Inc. (LNG) – Rating change “BUY” to “HOLD”
Buy Waste Management, Inc. (WM)

Security type: Common Stock
Sector: Waste disposal
Price: $225
52-week range: $196.59 - $235.81
Yield: 1.45%
Profile: Waste Management is the largest provider of solid waste services in the U.S.

Positives

• The extensive holdings of 263 active landfills cannot be duplicated and presents a wide moat.
• Revenue and earnings are expected to grow at a stronger clip in the year ahead.
• WM has the strongest position in a highly practical and dependable industry that is also growing.
• Defensive stocks tend to outperform during and after times of market volatility.

Risks

• The company is so large that it is difficult to find acquisitions that move the needle.
• The longer-term trend for governments is to reduce the level of waste.

Featured Action

Buy Waste Management, Inc (WM)

The average American produces about 4.5 pounds of trash every day. That’s a lot. According to Dumpsters.com the global per citizen average is 1.6 pounds per day. The average American family produces about 18 pounds per day. That translates to yearly trash generation of 1642 pounds per person and 6570 pounds per family every year. Multiply that by about 360 million citizens and you get the idea.

The nation generates over 800,000 tons daily, enough to fill up Busch Stadium in St. Louis more than twice. It’s big business to clean all that up every day. And the business is growing. Grandview Research estimates that the U.S. waste management market will grow by a compound annual growth rate (CAGR) of 5.2% between 2024 and 2030.

Houston-based Waste Management is the largest provider of solid waste services in U.S. with $22 billion in annual revenue. It operates a fully integrated system of pick-up routes and transfer stations and has unmatched dominance in landfill ownership with 263 active landfills and 332 transfer stations.

The company picks up garbage and waste from around the country. The breakdown in sources of waste for 2024 was commercial (36.7%), industrial (23.1%), residential (21.2%), and other (19%). The waste goes to a transfer station where it is then sent to be sorted/recycled, to a waste-to-energy facility, or to a landfill. WM has growing businesses in recycling, where it is one of the largest players in the country, and waste-to-energy. But the vast majority of revenue comes from landfills.

The landfill business is a key advantage for WM. The company has by far the largest landfill portfolio in the country, which is huge because such holdings are impossible to replicate. That gives WM a huge moat where significant new competition isn’t possible. A landfill releases more greenhouse gases into the atmosphere than just about anything else, except maybe an active volcano. That makes regulatory hurdles to open new ones enormous.

WM already has a massive number of existing properties and the ability to make acquisitions of companies with established landfills. In fact, WM acquired Advanced Disposal in 2020, which was at the time the fourth largest waste service company in the U.S. Last year, WM acquired Stericycle, the largest medical waste services provider in North America. It now has a strong presence in the growing medical waste business.

All right, that sounds good. WM has a big leg up in the waste business. It’s a very practical and dependable business, although not very glamorous. But how does that translate to the bottom line? WM has beaten S&P 500 returns over the last three- and five-year periods with returns of 55% and 113%, respectively. And the stock has done it with less volatility than the market, with a beta of 0.76.

But the relative returns may improve going forward. Management anticipates for 2025 “a step change in the company’s revenue and earnings.” WM posted 8% revenue growth for 2024 from the prior year but projects 16% revenue growth this year, along with 15% adjusted earnings growth and 17.6% growth in free cash flow at the anticipated midpoints.

The higher growth partially reflects the medical waste acquisition as well as growth from investments in recycling and energy. But it is also a product of improving margins. The company is leveraging its massive scale with dense routes and efficient processing to continually hone its processes and lower costs.

The company pays a quarterly dividend of $0.825, which translates to $3.30 per year and a current yield of 1.45%. It’s well supported by a 44% payout ratio. That’s not a great dividend, but it’s growing. WM just raised the current quarterly dividend by 10% and has raised the quarterly payout by 50% over the last five years. Companies that consistently grow the dividend tend to be the best-performing group in the market over the longer term.

This is a rock-solid company that makes up for boredom with returns. WM has delivered an average annual return of 18% over the last 10 years by collecting garbage. It should continue to perform well in good markets and it’s a nice conservative stock to hold for dicier markets like the current one. BUY

Waste Management, Inc. (WM)
Next ex-div date: March 14, 2025

Portfolio Recap

AGNC Investment Corporation (AGNC – yield 14.1%) – The mortgage REIT is holding up relatively well in the market turmoil. It’s a little bit off the high but it has been one of the more stable stocks over the past month. After a rough couple of years with rising inflation and interest rates, this mortgage REIT is having a good 2025 so far. Hopefully, it can keep going. The REIT reported solid earnings this quarter. AGNC has had a bad stretch over the last couple of years and it’s due for a significant turnaround. Hopefully it can maintain the momentum and make a run back past the recent high. BUY

AGNC Investment Corp. (AGNC)
Next ex-div date: March 31, 2025

Brookfield Infrastructure Partners (BIP – yield 6.1%) – It’s disappointing. The upside of this underperforming stock is that it’s defensive. But it sold down along with everything else in the recent turmoil. That’s weak sauce. BIP better show some chops soon or it will be cut loose. It’s perplexing because the business is sound. Earnings beat expectations with 8% FFO (funds from operations) growth in 2024 over the prior year and 10% minus exchange rates. Brookfield also announced a 6% distribution increase, marking the 16^th consecutive year of payout increases. The business is delivering but the stock price isn’t. It’s off the lows but it’s still eons below the early 2022 high. (This security generates a K1 form at tax time.) BUY

Brookfield Infrastructure Partners (BIP)
Next ex-div date: May 31, 2025, est.

Rating change – “BUY” to “HOLD”

Cheniere Energy Partners, L.P. (CQP – yield 5.2%) – The liquid natural gas (LNG) exporter has been pulling back in the recent market tumult after it surged to a new high after beating revenue estimates on rising LNG demand a few weeks ago. But it’s held up well under the circumstances. Natural gas is a strong beneficiary of rising electricity demand. It also helps that natural gas is the cleanest fossil fuel and is increasingly seen as a bridge to a clean energy future. U.S. exports of LNG are likely to continue to grow strongly and CQP is in a great position. That’s why CQP is still up 20% YTD in a down market. But it has started to show some weakness recently as the economic fears grow. The rating will be reduced to HOLD for now. (This security generates a K1 form at tax time.) HOLD

Cheniere Energy Partners (CQP)
Next ex-div date: May 10, 2025, est.

Enterprise Product Partners (EPD – yield 6.3%) – You have to love EPD in times like this. It hasn’t even budged in the falling market. It tends to lag its peers when things are good in the sector, but it makes up for that lack of excitement with a lack of excitement in terrible markets. Despite the tough market recently, EPD is within about a dollar of the 52-week high. Enterprise reported solid earnings with 7% EPS growth for the year and a 5% distribution hike, marking the 26^th consecutive year of an increase. EPD is still below the all-time high set in 2014 and can certainly move beyond that, especially with much higher earnings now. (This security generates a K1 form at tax time.) BUY

Enterprise Product Partners (EPD)
Next ex-div date: April 30, 2025, est.

Rating change – “BUY” to “HOLD”

FS KKR Capital Corp. (FSK – yield 12.4%) – A slower economy would not be a good development for this Business Development Company (BDC). It has a portfolio of small businesses that tend to be highly cyclical. But it has held up remarkably well in the recent market and is within less than 2 dollars of the high. The BDC is still in an uptrend that began last fall and continues to look solid. But it could pull back if these slower economic growth fears worsen. For that reason, the rating will be lowered to HOLD pending further economic developments. It is possible that the whole slowing economy narrative could lose traction in the weeks ahead. HOLD

FS KKR Capital Corp. (FSK)
Next ex-div date: March 19, 2025

Rating change – “BUY” to “HOLD”

Main Street Capital Corporation (MAIN – yield 7.3%) – As a BDC, this story is very similar to that of FSK, although the stock hasn’t been quite as resilient. MAIN has returned 32% over the past year but it has trended lower since the beginning of February. Main’s portfolio of companies not only makes high-interest loans, but it also takes equity stakes. The equity stakes are the primary reason the total returns have been better than just about every other BDC. If the economy hangs on, the BDC should continue to deliver, but if a slowing economy becomes an increasing problem, the stock price will fall from here. The rating will be lowered to HOLD pending economic news. HOLD

Main Street Capital Corp. (MAIN)
Next ex-div date: March 20, 2025

ONEOK Inc. (OKE – yield 4.5%) – OKE is down but certainly not out. It had been rising over the past week but is getting knocked back again because of the tariff news. The midstream energy company reported earnings recently that solidly beat estimates with revenue and per-share earnings growth of 33% for the quarter. ONEOK expects 8% earnings growth in 2025, somewhat muted by the costs of the acquisitions, but 15% growth in 2026. Volume across the board is solid and getting stronger. But it has been an unforgiving market the past few days. I expect this stock to recover quickly when the market levels off. BUY

ONEOK Inc. (OKE)
Next ex-div date: May 3, 2025, est.

The Williams Companies, Inc. (WMB – yield 3.7%) – This midstream energy company stock is off the highs but hanging tough. It’s still in an uptrend that began in early 2024. WMB was riding high as a natural gas company as electricity demand expectations soared. But it took a big hit last month after the DeepSeek news. Although it recovered much of the loss, WMB is selling down, along with just about everything else. Energy prices are down on these tariff fears, and the sector is taking a hit. Midstream companies are falling too, even though they are oil and gas price-sensitive in terms of earnings. I still like midstream energy for the rest of this year. WMB should recover when the market stabilizes. BUY

Williams Companies, Inc. (WMB)
Next ex-div date: March 14, 2025

AbbVie (ABBV – yield 3.1%) – The momentum continues as ABBV made another new high this week. The market is going to Hell in a handbasket, but ABBV keeps chugging higher. As a healthcare company, business isn’t negatively affected by a slower economy or probable tariffs either. Meanwhile, the ascent that began after the earnings report in January continues. Immunology drugs Skyrizi and Rinvoq, collectively, have made up for the lost Humira revenue. The earnings report showed AbbVie has replaced the Humira revenue and is poised for solid earnings growth. The stock made good returns while working through the Humira issues. It should do even better now. BUY

AbbVie Inc. (ABBV)
Next ex-div date: April 15, 2025

Ally Financial Inc. (ALLY – yield 3.6%) – It had been a strong start to the year for this online banker. But the slower growth narrative that developed last month has pushed ALLY back near the 52-week low. Auto loans, which are the bulk of the business, depend on a healthy auto market. If the economy does slow significantly, it can also negatively affect loan defaults. This stock is cyclical. We’ll hold on for now to see if that slowing economy fear has lasting traction. Hopefully the selling is overdone and the stock bounces back. But we’ll see. BUY

Ally Financial Inc. (ALLY)
Next ex-div date: April 30, 2025, est.

Broadcom Inc. (AVGO – yield 1.3%) Earnings – After taking the worst beating in years over the last month, this AI superstar soared more than 8% on Friday after another stellar earnings report. But the stock has been bouncing around with the volatile market this week. Broadcom soundly beat expectations with 25% revenue growth and 45% earnings growth and raised guidance for the current quarter. The even bigger news was that AI revenue grew 77% over last year’s quarter and reported that it has scored two more large AI chip customers. It appears well on track to make its lofty revenue goals over the next few years. Tech and AI are getting a comeuppance now. But the AI business is alive and well. Business is stronger than ever but the stock is being dragged lower by the sector. AVGO will be back strong. Patience should be well rewarded. BUY

Broadcom Inc. (AVGO)
Next ex-div date: March 20, 2025

Rating change – “BUY” to “HOLD”

Cheniere Energy, Inc. (LNG – yield 0.9%) – This is a great company with a bright future. But the market has become challenging and could get worse. LNG had held strong but has weakened recently. It will be downgraded to HOLD pending further developments in the market and the economy. But internal company news has been good. This natural gas exporter crushed earnings expectations last week. The company earned $4.33 per share, destroying expectations of $2.69 by 61% on record LNG production. The company will also have expanded operations to add to results this year. LNG should persevere beyond the current selloff as the fundamentals are very strong. HOLD

Cheniere Energy. Inc. (LNG)
Next ex-div date: May 8, 2025, est.

Constellation Energy Corporation (CEG – yield 0.8%) – This nuclear power company stock is continuing to get crushed in this market. The DeepSeek news hit the electricity trade, and CEG especially, hard. The stock plummeted over 40% from the January high. The fear is that AI will require less data than previously thought and data center plans will be stalled and the anticipated growth in electricity won’t occur. Nonsense – electricity demand is sure to grow, even if at a lower rate than previously anticipated. And the fears are likely overblown. The two huge recent deals (the Microsoft (MSFT) deal and the Calpine acquisition) will deliver a high level of earnings growth in the years ahead and there may be more new deals coming. The selling is likely overdone and CEG can come back fast. BUY

Constellation Energy Corporation (CEG)
Next ex-div date: May 15, 2025, est.

Digital Realty Trust, Inc. (DLR – yield 3.3%) – This data center REIT has been a great investment since it was added to the portfolio. But it has certainly been floundering of late. DLR spent the last three months falling more than 20%. It was recovering until it got clobbered by the DeepSeek news and possible negative repercussions on data center demand. DLR had benefitted mightily from the data center expansion prospects. The stock probably got a little too high too fast. But the future still looks extremely bright and DLR should recover going forward. Data center growth will continue to be a trend this year as the recent troubles probably fade into memory. HOLD

Digital Realty Trust, Inc. (DLR)
Next ex-div date: March 14, 2025

Eli Lilly and Company (LLY – yield 0.7%) – The superstar drug company stock got an unexpected drubbing over the last week, falling 11%. LLY had been soaring while the market got clobbered until a news event last week. A pipeline weight loss drug for Novo Nordisk (NVO) reported disappointing results in a trial. Lilly is a big player in the red-hot weight loss drug sector with its highly popular Zepbound. The weight loss drug players sold off in sympathy with the Novo news as worry spread that these drugs might not be as good as previously thought. But Novo is a competitor. And Zepbound is killing it. When a type of drug gets this hot, markets tend to overreact, especially in such an unforgiving market. I don’t think this news changes anything. And now, LLY is cheaper. BUY

Eli Lilly and Company (LLY)
Next ex-div date: May 15 2025, est.

McKesson Corporation (MCK – yield 0.4%) – Quietly, while nobody is looking, this supply chain pharmaceutical distributor has had an epic rise and made a brand new high this week while the rest of the world crashes and burns. It’s up nearly 40% since this upside move began in late September. The stock had been knocked down last summer and fall after the company reported supply chain issues with weight loss drugs. But those problems are behind the company. It should resume its old habit of slowly going higher and higher as it deals in a market that grows all by itself because of the aging population. BUY

McKesson Corporation (MCK)
Next ex-div date: June 3, 2025, est.

Qualcomm Inc. (QCOM – yield 2.2%) – The mobile device chip company delivered earnings with strong quarterly results and raised guidance for 2025. Revenue rose 17% for the quarter and EPS rose 24%. Both easily exceeded expectations. There was solid growth in just about every segment including iPhone demand. And guidance was raised for this year. But there wasn’t evidence of a strong AI smartphone upgrade cycle. And that’s really what the market is looking for. Several analysts expect an upgrade cycle to ignite sometime this year. And that could really move the stock higher. But a breakout is unlikely until that event is within sight. Meanwhile, QCOM has been knocked down with the rest of the tech sector. BUY

Qualcomm Inc. (QCOM)
Next ex-div date: June 6, 2025, est.

Toll Brothers, Inc. (TOL – yield 0.9%) – TOL is a cyclical company that doesn’t respond well to a slower economy. But that recent weakness is somewhat tempered by the falling mortgage rates, which makes housing more affordable. The slower growth narrative has hit TOL when it was already down, and the stock is at a 52-week low. It could be that the economic worries don’t have lasting traction. Narratives change often in the market. The longer-term supply/demand dynamic is hugely favorable to this company, and it will rebound eventually. We will hold onto the stock for now in hopes of a rebound. HOLD

Toll Brothers, Inc. (TOL)
Next ex-div date: April 10, 2025, est.

UnitedHealth Group Inc. (UNH – yield 1.7%) – UNH took another hit last month when the market wasn’t thrilled with the earnings report and the FTC accused the company, along with others, of overcharging for life-saving drugs. Earnings were mixed as revenue missed, and earnings beat. However, the company also reiterated 2025 guidance. It’s been one thing after another with this one. The strong track record of outperformance leads me to believe this stock can make a move at some point. But the bad news keeps coming. It was downgraded to a HOLD until UNH shows evidence of bottoming out. It has moved off the bottom and is one of the few stocks in the black over the past couple of weeks, which shows some defensive chops. HOLD

UnitedHealth Group Inc. (UNH)
Next ex-div date: June 10, 2025, est.

NextEra Energy (NEE – yield 3.0%) – The regulated and clean energy utility stock loves this terrible market. It’s having a great March. It seems like every time the market gets crushed, NEE has a great day. Investors are attracted to its defensive characteristics as a slower economy is feared. But NEE has historically outperformed other defensive stocks significantly. It just got walloped by inflation and rising rates. But rates are falling, and NextEra is poised for even stronger growth ahead as electricity demand rises. BUY

NextEra Energy Inc. (NEE)
Next ex-div date: May 31, 2025, est.

USB Depository Shares (USB-PS – yield 5.6%) – A slower economy? A recession? No problem. Markets like this are a good time to be in fixed income. Longer-term interest rates are falling and that should have the effect of increasing the price. The 10-year fell from 4.8% to around 4.2% and fixed income is rallying. This preferred stock has endured a tough bond market and should thrive in a good one. BUY

USB Depository Shares (USB-PS)
Next ex-div date: April 15, 2025

Vanguard Long-Term Corp. Bd. Index Fund (VCLT – yield 5.2%) – Ditto for VCLT. The long-term corporate bond ETF loves falling interest rates and hates rising ones. There will be more price pressure if rates continue to rise, and vice versa. But the situation over the course of the year should be good. BUY

Vanguard Long-Term Corp. Bd. Index Fd. (VCLT)
Next ex-div date: April 1, 2025, est.

Dividend Calendar

Ex-Dividend Dates are in RED and italics. Dividend Payments Dates are in GREEN. Confirmed dates are in bold, all other dates are estimated. See the Guide to Cabot Dividend Investor for an explanation of how dates are estimated.

The next Cabot Dividend Investor issue will be published on April 9, 2025.

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